SBI has introduced a Home Loan scheme 'SBI FlexiPay Home Loan', where the borrower has the option to pay the interest component in the first few years. This increases the loan eligibility by upto 20% as compared to the standard plan. Borrowers under this scheme have the the option of paying only interest during the moratorium (pre-EMI) period of three to five years. The bank claims that the customer will have to pay 'moderated EMI's' after this period. The EMI will be stepped up in subsequent years. This scheme is primarily available to salaried individuals with a two-year track record. The maximum age for availing loan under this scheme is 45 years. Loans are offered with a repayment tenure of minimum 25 years and maximum 30 years. No prepayment penalty will be levied if the loans are prepaid. The scheme increases the loan eligibility as compared to normal loan schemes.

The scheme looks appealing especially for youngsters who are looking to buy a house but do not have financial capacity to make a large contribution at present. Though it is tempting for consumers to take loans under this scheme by borrowing higher amounts, it carries huge risks. If a customer chooses the 'interest-only' option, the EMI is likely to shoot up once principal repayment through EMI commences after 3-5 years. The bank claims that the customer will have to pay 'moderated EMI's' after moratorium period. However, it has not defined how moderate the EMI's will be. One of the key assumptions is that the salary of the borrower will rise after the period of 3-5 years, once the moderated EMI kicks in. The borrower may be over-burdened with debt if salary does not increase proportionately. The sudden spike in EMI may hurt the borrower.

The second risk is if interest rates rise in future, the EMI will increase. Though the general consensus is that were are in a declining interest rate scenerio for the time being, these loans are for a long tenure of 25-30 years. Interest rates keep on changing over time and hence the risk of rising interest rates remains. Don’t touch this product and please share this article widely.